5 Easy Steps for Painlessly Rolling Over Your 401(k)
Did you leave a retirement account lingering at a former job? (Or, if you’re job hopping like most people these days, a few retirement accounts at a few former jobs?) “Unfortunately, most 401(k)s are set up on the assumption that you’ll work at one company for a long time,” David Weliver, creator of MoneyUnder30.com, says. “And the rollover process is pretty outdated.” Still, he generally recommends consolidating various retirement accounts. It’s a bit of a headache (we're not gonna lie), but it’ll only take a few hours, total, and your future self will thank you.
1. GET THE SCOOP ON YOUR FORMER COMPANY’S POLICY.
Assuming you meet the minimum balance, former employees typically have the option to leave your money right where it is. Your money in that old 401(k) will continue to be invested with the company’s current firm. Thing is, if there’s a minimum balance that you haven’t met, the firm might automatically cash you out, “meaning you’ll get hit with a 10 percent penalty and a tax bill you weren’t expecting,” Weliver says.
Even if you meet the requirements, you might be able to do more with your money elsewhere. “There are significant advantages to doing a rollover, least of all that you won’t have money floating out there at various banks that you might forget about down the road.”
2. ROUND UP THE DETAILS.
If you don’t already have one, start a file with all your 401(k) paperwork, including statements you get in the mail or information you received after leaving a company. Log on to each account and note the balance of each. Before moving forward, you need to reacquaint yourself with your current situation.
Now, before going any further, take a breath. Prepare to be frustrated. (A staff writer at MoneyUnder30.com recently went through this herself, and even she found the process of rolling over a 401(k) to be “exceptionally tedious.”)
3. MULL OVER YOUR OPTIONS.
At this point, you can go a few possible routes. First, you can roll your old 401(k) into a new 401(k) that you've opened with your current employer. Or, you can roll your old 401(k) into an IRA (Individual Retirement Arrangement). Technically, you could also cash out your 401(k) and walk away with the money, but it’s not usually advisable; you’ll have to pay taxes on the amount and you’ll get hit with an early-withdrawal penalty.
Setting up a new 401(k)? Your new provider can help you move money from an old account (or a few of them).
4. INVESTIGATE AN IRA.
“This is the hardest part,” Weliver says. “Most people ignore their 401(k)s because it’s intimidating to choose where to put that money.”
He recommends big mutual fund companies, such as Fidelity, Charles Schwab, or Vanguard (but of course, these aren't your only options and may not be the best fit for you). “Vanguard is perennially popular,” he says. “They really set the stage for low-cost investing.” So-called robo-advisors, such as Betterment, are also great options for hands-off investors.
5. PICK UP THE PHONE (YES, YOU HAVE TO).
It might seem medieval, but here’s the thing: You need to pick up the phone and speak to a representative to complete a rollover. They can advise you on the process, and they’ll be happy to answer your questions. Inquire about a minimum balance, fees, or any other fine-print details of the account. “When you’re calling about transferring money to a particular company, the person you get on the phone is going to be your best friend,” Weliver says, “and you should take advantage of that fact.”
Here’s what will likely happen: Say you’re opening an IRA with Vanguard. The person you speak with at Vanguard will actually call the firm that holds your existing 401(k)—say that’s Fidelity. The Vanguard rep will conference in a Fidelity rep, and they’ll hammer out the details. “They take care of it all, while you’re on the line, in about 10 minutes,” Weliver says.
In most cases, though, the company that held your 401(k) will mail you a live check that you’ll then forward on to the folks who will take care of your IRA. Don’t worry; they’ll walk you through all the details.
NEED SOME MOTIVATION?
How’s this: According to Weliver and the folks at Money Under 30, your 401(k) can make you a millionaire. Time to get those finances in order, stat.